Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Small Accounting Firm Sold at 20x EBITDA with Client Retention Data
Transcript
- Lucas: A four-person accounting firm in suburban Milwaukee just sold for 20 times EBITDA. Not a tech company, not a roll-up play—a tax and bookkeeping shop with a single office and clients who mostly walk in the door. Luna: Twenty times feels high for a traditional services business. What was the buyer actually paying for? Lucas: Client retention data. The firm had a nine-year average client relationship and 94 percent annual retention. The buyer—a regional firm with about 80 employees—looked at that recurring revenue stream and saw something close to an annuity. They modeled the acquisition as buying a book of business that would keep generating cash with very little churn. Luna: So the multiple isn't really about growth. It's about predictability. Lucas: Exactly. The firm's revenue was $2.8 million, about 60 percent from tax prep and 25 percent from monthly bookkeeping. The rest was advisory work. The bookkeeping contracts were the real prize—monthly retainers, multi-year relationships, and very few cancellations. The buyer valued those contracts at roughly 2.5 times their annual value, and the tax work at about 1.5 times. That blend got them to the 20-times number. Luna: How did the seller package that data for the buyer? I imagine a small firm doesn't have a CRM tracking retention metrics. Lucas: The owner kept meticulous paper records—literally a binder with client start dates and notes on every annual check-in. The broker helped him translate that into a spreadsheet showing retention rates, average revenue per client, and the number of multi-service clients. Turned out 40 percent of clients used both tax prep and bookkeeping, which pushed retention even higher. The buyer saw cross-sell potential. Luna: Forty percent cross-sell is decent. But I'm curious—was there any client concentration risk? Lucas: There was. The largest client represented about 8 percent of revenue. The broker flagged it in the offering memorandum, but the buyer decided the overall retention rate compensated for that. They also insisted on a seller-financed earn-out tied to client retention over two years. The seller got 60 percent cash at close and the rest based on keeping at least 90 percent of clients for two consecutive tax seasons. Luna: That earn-out seems fair. It aligns incentives—seller helps with transitions, buyer protects the book. Lucas: Right. And it worked. The seller stayed on for six months as a consultant, introduced the buyer's team to every client personally. The buyer also hired one of the firm's staff accountants to handle day-to-day work. By the end of year one, retention was 96 percent. The earn-out paid out in full. Luna: What about the purchase price—do you know the actual dollar amount? Lucas: The firm's EBITDA was around $1.1 million, so at 20 times that's $22 million. For a four-person shop, that's a life-changing exit. The owner was in his early 60s and wanted to retire—he'd built the firm over 30 years. The buyer got a plug and play client base with no real transition risk. Luna: That multiple is above what I typically hear for professional services. Where does it sit compared to, say, a law firm or a consulting practice? Lucas: Law firms with recurring work—like estate planning or corporate retainers—often trade at 6 to 10 times EBITDA. Consulting firms are lower, around 4 to 8 times. But accounting firms with high retention and recurring monthly contracts have been getting 12 to 18 times recently. The 20-times here is at the high end, and it's because of the data. The buyer could model future cash flows with confidence. Luna: So the lesson is: if you're running a services business, start tracking retention metrics now. Even if it's just a binder. Lucas: Absolutely. The broker told me that most small accounting firms don't have this data. They know their clients, but they can't prove retention in a way a buyer trusts. This seller had the proof. It cost him nothing to keep those records, and it added millions to his exit price. Luna: One thing I'm thinking about—did the buyer have any concerns about the firm's reliance on the owner's personal relationships? That seems like a risk in any relationship-based business. Lucas: It was the top due diligence item. The buyer did a client survey—anonymously—to gauge satisfaction and willingness to stay under new ownership. Over 90 percent of respondents said they'd remain. The buyer also structured the deal so the owner introduced the new team gradually. By the time the owner left, most clients had already worked with the new accountant on at least one project. Luna: That's smart. It's basically a managed transition. I wonder how many sellers don't think about that until the buyer raises it. Lucas: A lot. Brokers see deals fall apart because the seller is the business. This seller had the opposite problem—he was the business, but he also had the systems and data to prove it could run without him. That's exactly what a buyer wants. Luna: And the staff—did they stay on? Lucas: The staff accountant we mentioned stayed. The other two were part-time and left after the transition. The buyer hired two new people to handle the additional capacity. So net, the headcount stayed about the same. Luna: If this conversation has been useful for thinking about your own business's value, we should mention that the way we keep this podcast ad-free is through listener support. If you've gotten something out of it, you can buy me a coffee at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: Yeah, and it genuinely makes a difference. We don't run ads, and that's because of listeners who chip in. So thank you to those who have. Luna: Alright, back to the accounting firm. One final question: if a listener runs a small professional services firm, what's the single most important thing they should do today to increase their exit value? Lucas: Start documenting client tenure and revenue per client. Put it in a spreadsheet. Track it quarterly. If you can show a buyer that your clients stay an average of eight years and generate $5,000 each annually, you've just created a data asset worth multiples. It's simple, cheap, and most sellers don't do it. That's the edge. Luna: And don't forget the binder. Lucas: Paper or digital, just do it. Thanks for listening.